Industry Analysis Report for Machine Shops

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NAICS CODES: 33271
SIC CODES: 3599
INDUSTRY PROFILE
Machine Shops
Companies in this industry use machine tools to modify metal, plastic, and composite materials to produce
finished products. No major companies dominate the industry.
Worldwide, revenue for machine shops varies with manufacturing output. Because machine shops play a
manufacturing support role, often operating as de facto subsidiaries of their customers, their work tends to be
local.
The US machine shop industry includes about 20,000 companies with combined annual revenue of about $37
billion.
Demand depends on manufacturing activity. The profitability of individual companies is linked to engineering
expertise and operating efficiency. Larger shops have the ability to invest in advanced production machinery.
Smaller shops can compete effectively by serving specialized customers, or by providing engineering services.
The US industry is highly fragmented: the 50 largest companies generate about 10% of revenue.
Machine shops are intermediaries in industrial production: generally, they receive unfinished parts or raw
materials from a manufacturer, perform various operations, and return the parts to the manufacturer for further
processing. They own and operate special machine tools that can perform a variety of operations, including
drilling; boring (enlarging an existing hole); tapping (cutting threads inside a drilled hole); threading (cutting threads
on a bolt); cutting; milling (removing material from a surface); and grinding (usually a finishing operation). These
operations involve material removal, frequently with great precision. The bulk of machine shop work is performed
on metal, but plastics and composite materials are also machined.
The machines that perform these operations are usually expensive and often computer-controlled. Machine
tools vary by the type of operation they perform, the size of a piece they process, and the precision of their
operations. Many are operated with computer numerical controls (CNC). Machine shops may own dozens of
different machine tools produced by a variety of manufacturers. Modern machine shops are highly automated,
with computer programs aiding the design of parts, as well as controlling the machines that are used to
manufacture them. Parts may be moved from one machine to another manually or using robotics. Aside from a
few US companies, many major machine tool makers are German, Japanese, or Swiss.
As the methods for machining have become more technologically complex, so too have the tools for managing
shop operations. Many providers of customer relationship management (CRM) and enterprise resource
planning (ERP) software, particularly those aimed at the small and mid-size business segments, offer application
suites tailored for the manufacturing sector. There are also software vendors dedicated specifically to
developing tools for managing machine shop processes. Such software can help businesses submit bids, order
materials, schedule jobs, manage inventory, and track shipments.
Four major operating activities in machine shops are pre-production, machine setup, actual production, and
quality control. Machine setup for a particular job can be time-consuming and can hugely affect costs. Major
material costs for machine shops are the expensive, specially hardened l bits consumed in the various
operations, including drilling bits, milling heads, cutting tools, and abrasives.
Technology
More machine shops are expected to invest in robotics to enhance productivity, reduce operating costs, and
Industry Overview
Competitive Landscape
Products, Operations & Technology

increase competitiveness. North American industrial robot shipments rose 10% in 2016 over 2015 levels,
according to the Robotic Industries Association.
Additive manufacturing, also known as 3D printing, is another technology with applications in machine shops.
Additive manufacturing produces solid, three-dimensional objects by successively layering materials according to
a digital design. Hybrid machine tools are being developed that combine additive and subtractive (cutting, milling,
turning, and grinding) manufacturing technologies to offer machinery capable of a wider variety of parts with
complex geometric shapes.
Marketing for machine shops consists largely of direct contacts with local manufacturers. Because of the need
for close technical consultation between machine shops and customers, the work of most machine shops is
usually confined to a very local area. New business may also come through requests for proposals (RFPs)
from manufacturers familiar with the company. Customers can be in a wide variety of manufacturing industries.
Because work is local, companies often have a large concentration of customers in the same industry.
Major end-users include the aerospace, automotive, chemical, electronics, medical, oil and gas, and industrial
machinery industries. New work is often acquired through job bidding. While pricing is always a consideration
for new business, product quality and the ability to meet production timetables are often of greater concern.
Management expertise is very important in properly pricing a bid, since the workability of materials, the
complexity of machine setup, and the capabilities of individual pieces of machinery can vary substantially.
Machine shops have large investments in machinery and equipment, including drill presses; lathes (turning
machines); and milling and grinding machines. Individual pieces of equipment may cost several hundred
thousand dollars and can often be bought with financing provided by the manufacturer. On average, capital
expenditures represent about 5% of sales. The industry is labor-intensive: average annual revenue per
employee is about $135,000.
The US industry's working capital turnover ratio averages about 25%. Shops generally don't have large
investments in inventory, because customers typically provide materials. There is very little seasonality in
production or cash flow, but the industry is susceptible to customer work stoppages and economic cycles, which
can produce highly uneven and unpredictable cash flow. The value of inventory is usually about 10% of sales,
and inventories turn about six times per year. Machine shop inventories tend to be split evenly between finished
goods, work-in-progress, and raw materials.
Demand for machining services depends on the level of US manufacturing activity, which can vary significantly
from year to year. Many machine shops depend directly on the health of a single end-use industry. The machine
shop industry gets large amounts of business from the auto and aircraft industries and electronics and industrial
machinery producers. If a major customer or industry group closes or moves manufacturing operations, local
machine shops may experience a precipitous drop in demand, and collection periods and questionable accounts
may increase. Accounts receivable average about 50 days, but collection periods tend to be longer for smaller
companies (under $5 million in annual sales).
Working Capital Turnover by Company Size
The working capital turnover ratio, also known as working capital to sales, is a measure of
how efficiently a company uses its capital to generate sales. Companies should be
compared to others in their industry.
Sales & Marketing
Finance & Regulation

Regulation
Because of the nature of working with metals, including the use of lubricants and solvents and the production of
sizable amounts of metallic wastes, machine shops can have environmental pollution problems, particularly with
regard to ground contamination and toxic waste disposal. Some types of machining operations can also
release fine particles into the air, creating hazardous workplace conditions unless proper control steps are taken.
The EPA administers environmental pollution regulations; OSHA administers workplace regulations.
The global machine shop industry is dependent on the level of international manufacturing activity. However,
because machine shops play a manufacturing support role, often operating as de facto subsidiaries of their
customers, machine shop work tends to be local, and is less prone to crossing international boundaries than
many other types of manufacturing.
Demand for machine shop work within a given region or country is determined by demand for other manufactured
products further up the supply chain within that region. China, with its massive build-up of manufacturing
capacity and factory output, is a hotbed of machine shop growth. China is currently the offshore
manufacturing headquarters for manufacturers in the US, Canada, and Western Europe. But rising wages, a
rapidly growing middle class, and higher transportation costs may prompt some western manufacturers to look
for low-cost manufacturing elsewhere, often much closer to where a product will be purchased or consumed. For
US companies this "nearshoring" may mean moving offshore manufacturing operations from China to Latin
America, or even back to the US. For Western European manufacturers, outsourced operations might be moved
from India or China to Eastern Europe. Increased investments in industrial automation technologies, including
robotics, are also expected to fuel the nearshoring trend.
The migration of manufacturing capacity as it follows global trends in wages and transportation costs will affect
where demand for machine shop work rises or declines. Where machine shop work will be in high demand also
depends on several key industries. In 2009, China surpassed the US as the world's largest automobile market.
But after years of rapid growth, China's automotive market is expected to be relatively flat in 2017, according to
Scotiabank. Among emerging markets, Eastern Europe is expected to experience the strongest demand growth
for automobiles. Automotive markets in Russia and South America are forecast to rebound somewhat in 2017.
Fabricated metal products are another industry that drives demand for machine shops. The rising affluence of
many emerging economies will drive demand for machinery, appliances, and computers which would increase
the need for the specialized bolts, screws, nuts, and other machined or turned products made in machine shops.
Change in Dollar Value of US Trade - US International Trade Commission
Imports of machine shop products to the US come primarily from Taiwan, China, Japan,
Germany, and Canada. Major export markets for US machine shop products include
Mexico, Canada, China, UK, and Germany.
Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents
financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of
companies in over 900 industries (SIC and NAICS). More data available at www.microbilt.com.
International Insights